IFCRM BLOG

1950s financial management turned into an insider looking in function. That is, the emphasis shifted to utilization of funds from rising of funds. So, choice of investment, capital investment appraisals must be done properly. In the 1960s portfolio management of assets gained importance. In the selection of investment opportunities portfolio approach was adopted, certain combinations of assets give more overall return given the risk or give a certain return for a reduced risk. In the 1970s the capital asset pricing model, arbitrage pricing model, option pricing model, were developed all concerned with how to choose financial assets. In the 1980s further advances in financial management were found. Conjunction of personal taxation with corporate taxation, financial signaling, efficient market hypothesis, was some newer dimensions of corporate financial decision paradigm. Further merger and acquisition became an important corporate strategy.

Financial management is an area of financial decision making, harmonizing individual motives and enterprise goals. Financial management is concerned with the managerial decisions that result in the acquisition and financing of long-term and short-term credits for the firm. As such it deals with the situations that require selection of specific asserts and combination of asserts, the selection of specific liability / combination of liabilities as well as the problem of size and inflows and outflows of funds and their effects upon managerial objectives. It influences the profitability / return on investment of a firm. It influences cost of capital. Efficient fund managers endeavor to locate fewer sources so as to enhance profitability of organization. It affects the liquidity position of firms. It enhances market value of the firm through efficient and effective financial management. Financial management is very much required for the survival, growth expansion and diversification of business.

Finance manager or Director is very popular in Indian corporate sector. The key function of any financial manager in India is management of funds. It means given the constraints, he must ensure optimum utilization of funds. The financial managers have significant involvement in injecting financial discipline in corporate management processes. They are responsible for emphasizing the need for rational use of funds and the necessity for monitoring the operations of the firm to achieve expected results. The finance functions of augmenting resources and utilization of funds, no doubt, have a significant impact on other functions also. In fact, between finance on one side and production, marketing and other functions on the other side, an inseparable relationship exists. The Board of directors has been bestowed with the onerous responsibility of reviewing financial procedures, formulation of financial policies, and selection of right finance personnel with professional capabilities like Charted Accountant.

Organization of finance function differs from company to company depending on their respective requirements. In many organizations one can note different layers among the finance executives such as Assistant Manager, Deputy Manager, and General Manager. The designations given to the executives are different. They are Chief finance officer, Vice-president, Financial controller, General Manager, Finance officers. The Board of Directors, who is at the helm affairs, normally constitutes a finance committee to review and formulate financial policies. Two more officers, namely treasurer and controller may be appointed under the direct supervision of CFO to assist him or her. The Board of Directors is the supreme body under whose supervision and control Managing Director, Production Director, Personnel Director, Financial Director, Marketing Director perform their respective duties and functions.

When funds have been procured then a decision about investment patterns is to be taken. The selection of an investment pattern is related to the use of funds. A decision will have to be taken as to which assets are to be purchased. The funds will have to be spent first on fixed assets and then an appropriate portion will be retained for working capital. The decision making techniques such as capital budgeting. Opportunity cost analysis, may be applied in making decisions about capital expenditures. While spending on various assets, the principles of safety, profitability and liquidity should not he ignored. Finance function has obtained the status of a science and art. As finance function has far reaching significance in overall management process, structural organization for further function becomes an outcome of important organization problems. The ultimate responsibility of carrying out the finance function lies with the top management.

The capital structure refers to the kind and proportion of different securities for raising funds. After deciding about the quantum of funds required it should be decided which type of securities should be raised. It may be wise to finance fixed assets through long term debts. Even if gestation period is longer, then share capital may be most suitable. Even here if gestation period is longer, then share capital may be most suitable. Long term funds should be employed to finance working capital also, if not wholly then partially. Various sources from which finance can be increased which includes share capital, debentures, financial institutions, commercial banks, public deposits. If finance is needed for short periods then banks, public deposits and financial institutions may be appropriate on the other hand; if long term finance is required then share capital and debentures may be useful. If management does not want to dilute ownership then debentures should be issued in preference to share.

The scope of finance function is very wide. While according is concerned with the routine type of work, finance function is concerned with financial planning, policy formulation and control. The financial organization depends upon the nature of the organization-whether it is a proprietary organization, a partnership firm or corporate body. The significance of the finance function depends on the nature and size of a business firm. The role of various finance officers must be clearly defined to avoid conflicts and the overlapping of responsibilities. Financial planning first task of a financial manager is to estimate short-term and long-term financial requirements of his business. For this purpose, he will prepare a financial plan for present as well as for future. The amount required for purchasing fixed assets as well as the needs of funds for working capital will have to be ascertained. The inadequacy of funds will adversely affect the day to day operations of the concern whereas excess funds may tempt a management.